Publications

STARK II FINAL RULE - PHASE I

A Kinder and Gentler Stark?

By: Andrew B. Wachler and Phyllis A. Avery
Wachler & Associates, P.C.
Royal Oak, MI

On January 4, 2001, the Health Care Financing Administration ("HCFA") issued the first part of its final regulations implementing the Stark II ban on physician self-referral. 66 Fed. Reg. 856 (2001). In response to numerous complaints that the Stark II proposed rule was unnecessarily intrusive and sought to micro-manage health care practices, HCFA attempted to minimize the impact on common relationships in the final rule by interpreting the statutory prohibitions narrowly and the exceptions broadly. Efforts to achieve this goal are evidenced by the many changes in this final rule. Nonetheless, it is expected that health care providers and suppliers will still find that the Stark II requirements are burdensome and that they unnecessarily interfere with health care relationships. Some of these concerns may only be alleviated by amendments to the statutory prohibition itself.

The Stark II final rule issued on January 4th contains a 90 day comment period and is identified by HCFA as "Phase I" of the rulemaking. Phase I does not address all provisions of the Stark law. HCFA intends to publish "Phase II" of the rulemaking at a later date. Phase II will address those provisions not addressed in Phase I. Phase II will also address comments received in response to Phase I. Although HCFA promises that Phase II will be published "shortly," given the fact that the proposed rule generated 12,800 comments during a 60 day comment period, it is unlikely that the health care community will see Phase II any time soon.

STARK II - A BRIEF HISTORY

The Stark self-referral prohibition was originally enacted in 1989 in an effort to reduce overutilization of laboratory services motivated by financial considerations. The self-referral ban, referred to as "Stark I" after Representative Pete Stark who introduced the legislation, was aimed at preventing physicians from referring patients for laboratory services to entities in which they had a financial interest. The Stark I ban went into effect on January 1, 1992. As of that date, physicians were prohibited from referring Medicare beneficiaries for clinical laboratory services to entities with which they or members of their immediate family had a financial relationship. It also prohibited entities from making a claim for payment under the Medicare program for clinical laboratory services furnished pursuant to a prohibited referral. 42 U.S.C. 1395nn.

In 1993, the Stark I ban was expanded to encompass additional health care services considered to be particularly susceptible to overutilization resulting from physicians' financial interests. The Stark II amendments also applied aspects of the ban to Medicaid beneficiaries. The 1993 amendments, now known as "Stark II," went into effect on January 1, 1995. Stark II prohibits physician referrals of Medicare or Medicaid beneficiaries to entities with which they or members of their immediate family have a financial relationship for designated health services including: clinical laboratory services; physical therapy services; occupational therapy services; radiology services, including MRI, CAT scans, and ultrasound services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospitalization services. The ban also prohibits entities from making a claim for payment under the Medicare or Medicaid programs for the provision of a designated health service furnished pursuant to a prohibited referral. 42 U.S.C. 1395nn.

In August 1995, HCFA published the Stark I final regulations. 60 Fed. Reg. 41923 (1995). While the Stark I final rule applied directly only to referrals for clinical laboratory services, it was expected that many of the interpretations in the Stark I final rule would apply to the other designated health services as well. In January 1998, HCFA issued the Stark II proposed regulations with a 60 day comment period. Although many of the interpretations from the Stark I final rule were included in the proposed rule, the Stark II proposed rule contained significant changes. Interestingly, a number of these proposed changes have been abandoned in Phase I of the Stark II final rule.

PHASE I

As noted, this Phase I rule only addresses a portion of the Stark law. Specifically, it addresses the general prohibition and those general exceptions that are applicable to both ownership or investment interests and compensation arrangements. It also covers the definitions section of the Stark law. In addition to creating new general exceptions, Phase I also includes new exceptions applicable only to compensation arrangement. For the most part, however, the exceptions that are applicable only to ownership or investment interests and the exceptions that are applicable only to compensation arrangements will be addressed in Phase II of the rulemaking. The reporting requirements and applicable sanctions are also left for consideration in Phase II. In addition, Phase I only applies to referrals of Medicare beneficiaries. Referrals of Medicaid beneficiaries will be addressed in Phase II.

With one exception, the effective date of the Phase I regulations is January 4, 2002, a full year after publication. The delayed effective date was chosen in order to give individuals and entities time to restructure business arrangements to comply with the Phase I requirements. That portion of the final rule which reconciles the Stark law with home health certification and recertification requirements is effective on February 5, 2001. It should be noted that until Phase I is effective, technically the Stark I final rule is still in effect with respect to clinical laboratory services.

THE GENERAL PROHIBITION

The Stark II self-referral ban prohibits physician referrals of Medicare or Medicaid beneficiaries to entities with which they or members of their immediate family have a financial relationship for designated health services. The Phase I regulations implement this general prohibition with respect to Medicare beneficiaries. This Stark II final rule contains significant changes involving the interpretation of the general self-referral prohibition.. For example, the final rule revises the definition of referral, clarifies what constitutes an indirect financial relationship, adds an exception for indirect compensation arrangements, and exempts entities who do not know the identity of the referring physician.

Definition of Physician Added

While the preamble to the Stark I final rule referenced the definition of "physician" in the Social Security Act, it did not include the definition in the rule itself. Nor did the Stark II proposed rule. The Stark II final rule does add a definition of physician. A physician is defined in the Stark II final rule as a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry, or a chiropractor as defined in section 1861(r) of the Social Security Act. 42 CFR § 411.351. The referenced section of the Social Security Act provides, in certain instances, that the individuals qualify as physicians only when performing within the scope of their license or providing items and services they are legally authorized to provide.

Referral Redefined to Exclude Services Personally Provided by Referring Physician

According to the Stark II proposed rule, a "referral" would be defined, with certain exceptions, as either (1) a request by a physician for, or the ordering of, or the certifying or recertifying of the need for, any item or service for which payment may be made under Medicare Part B or by a Medicaid State plan (including the request for a consultation with another physician and any test or procedure ordered by, performed by, or supervised by that other physician); or (2) a request by a physician that includes the provision of any designated health service, the establishment of a plan of care that includes designated health services, or the certifying or recertifying of the need for such designated health service. This proposed definition would include as a referral any designated health service ordered and personally performed by the physician who made the order.

In response to the numerous objections to such a result, HCFA has redefined referral to specifically exclude any designated health service personally performed by the referring physician. The regulation does specify that a service is not personally performed by the referring physician if it is performed or provided by another person, including, but not limited to, the referring physician's employees, independent contractors, or group practice members. 42 CFR § 411.351. The preamble adds that the referring physician must "physically" perform the service to qualify for the exclusion from the definition of a referral. 66 Fed. Reg. at 871. It appears from the preamble that at this time even "incident to" services which are directly supervised by the referring physician would not qualify for the exclusion from the definition of referral. Id. HCFA is soliciting comments on whether and under what circumstances services performed by a physician's employees could be treated as the physician's personally performed services. 66 Fed. Reg. at 872.

In addition, the definition of referral in the Stark II proposed rule included the statutory exception for certain requests by pathologists, radiologists and radiation oncologists, as long as the request results from a consultation initiated by another physician and the test or service is furnished by or under the supervision of the pathologist, radiologist or radiation oncologist. The Stark II final rule clarifies that, for purposes of this exception, the request for a consultation may be made to a particular physician or to an entity with which the physician is affiliated. 42 CFR § 411.351.

The Stark II final rule also clarifies the definition of referral by adding that a referral can take any form including, but not limited to, written, oral or electronic. 42 CFR § 411.351.

Consultation

As noted, the definition of a referral includes a request for "consultation" with another physician and any test or procedure ordered by, performed by, or supervised by that other physician. As set forth above, the definition of referral also includes the statutory exception for certain requests by pathologists, radiologists and radiation oncologists, as long as the request results from a "consultation" initiated by another physician and the test or service is furnished by or under the supervision of the pathologist, radiologist or radiation oncologist. For the first time, the Stark II final rule adds a definition of consultation to the regulations. HCFA notes that its definition of consultation for purposes of the Stark law has no relation to coverage or payment rules pertaining to consultations.

A "consultation" in the Stark II final rule is defined as a professional service furnished to a patient by a physician if (1) the physician's opinion or advice regarding evaluation and/or management of a specific medical problem is requested by another physician; (2) the request and need for the consult are documented in the patient's medical record; (3) after the consultation is provided, the consulting physician prepares a written report which is provided to the physician who requested the consult. With respect to radiation therapy services, the final rule adds that radiation oncologists who provide radiation treatments over a period of time will be considered to do so pursuant to a consultation as long as the radiation oncologist communicates with the referring physician on a regular basis about the course of treatment and progress. 42 CFR § 411.351.

Notably, the preamble reflects HCFA's interpretation that the exception for consultations provided by pathologists, radiologists and radiation oncologists only protects the referral of designated health services from the pathologist, diagnostic radiologist, or radiation oncologist to the designated health provider. It then states that if the designated health service provider knows or has reason to suspect that the referral from the specialist originated from the referring physician and the provider has a financial relationship with the referring physician, the provider cannot submit a claim for payment unless the financial relationship qualifies for an exception. It continues that if the referring physician knows or has reason to suspect that the consultant will order designated health services from an entity wit which the referring physician has a financial relationship, then unless an exception applies the referral is prohibited. 66 Fed. Reg. at 874.

Referring Physician Definition Clarified.

Under the Stark I final rule, the definition of "referring physician" was interpreted to attribute a referring physician's referral to all physicians in the referring physician's group practice. As a result, if one member of a group practice had a financial relationship with an entity which would prohibit that member's referral to the entity, no one in the group could refer to that entity. The Stark II proposed rule reflected that HCFA had reconsidered the issue and determined that there was no clear reason to extend the effects of one physician's relationships on all other members of the group. The preamble to the proposed rule did note that in any instance in which a group member is in a position to exert influence or control over the referrals of other group physicians, the prohibition could still apply.

The Stark II final rule revises the definition of referring physician to adopt both the definition and interpretation from the proposed rule. The definition now states that a referring physician is a physician who makes a referral or who directs another person or entity to make a referral or who controls referrals made by another person or entity. 42 CFR § 411.351. Thus, one group physician's referrals will not be attributed to another group member unless the physician with the financial relationship is in a position to direct or control the referrals of the other physician.

Definition of Entity Expanded and Clarified.

The term "entity" was defined in the Stark II proposed rule as a physician's sole practice or a practice of multiple physicians that provides for the furnishing of designated health services, or any other sole proprietorship, trust, corporation, partnership, foundation, not-for-profit corporation, or unincorporated association. The Stark II final rule expands on this definition. It adds that an entity can be "a practice of multiple physicians or any other person." 42 CFR § 411.351.

The definition of entity also adds that an entity is considered to be "furnishing" designated health services if it is the person or entity to which HCFA makes payment whether directly, by way of assignment, or (with limited exception) as a result of a valid reassignment. The rule specifically states that health plans, managed care organizations ("MCOs"), provider-sponsored organizations ("PSOs") and independent practice associations (IPA's) which receive payment as the result of a reassignment will not be deemed to be furnishing designated health services. Nonetheless, the rule also states that a health plan, MCO, PSO, or IPA that employs a supplier or operates a facility that could accept reassignment from a supplier is the entity that is furnishing designated health services for any services provided by such supplier. CFR § 411.351.

This change was made to address the possible adverse impact on physician ownership of MCOs and IPAs. Concerns had been raised that MCOs and IPAs would be considered "an entity furnishing designated health services" whenever they billed for the services provided by another entity pursuant to contract. The preamble reflects that HCFA believes that this change in the definition of entity should allow for physician ownership of most types of network IPAs and MCOs. 66 Fed. Reg. at 913-914.

Immediate Family Member

The Stark II final rule adopts the definition of immediate family member included in the Stark II proposed rule replacing only the term birth parent with the term natural parent. 42 CFR § 411.351. References to a physician in this article include reference to members of the physician's immediate family.

Financial Relationships Revisited

The Stark II law specifies that financial relationships include ownership or investment interests and compensation arrangements. The Act states that an ownership or investment interest may be through equity, debt, or other means and includes an interest in an entity that holds an ownership or investment interest in any entity providing designated health services. 42 U.S.C. § 1395nn(a)(2). The Act defines compensation arrangements as involving any remuneration between a physician and an entity, and then it specifies that remuneration includes any remuneration, direct or indirect, overt or covert, in cash or in kind. 42 U.S.C. § 1395nn(h)(1).

Ownership or Investment Interests

The Stark II proposed rule included the definition of ownership or investment interests from the Act. Although not in the body of the proposed regulation, the preamble to the Stark II proposed rule provided further detailed explanation of what would constitute an ownership or investment interest through equity or debt. Much of this discussion from the preamble to the proposed rule has been incorporated into the body of the Stark II final regulation in addition to reiterating the definition of ownership or investment interests from the Act. For example, the Stark II final rule states that an ownership or investment interest includes, but is not limited to, stock, partnership shares, limited liability company memberships, as well as loans, bonds, or other financial instruments that are secured with an entity's property or revenue or a portion of that property or revenue. 42 CFR § 411.354(b)(1). The Stark II final rule adds that an ownership or investment interest in a subsidiary company is neither an ownership or investment interest in the parent company, nor in any other subsidiary of the parent (unless the subsidiary itself has an ownership or investment interest in the parent or another subsidiary). 42 CFR § 411.354(b)(2).

The Stark II proposed rule would also have specifically included in the regulation that an ownership or investment interest includes options and non-vested interests (including interests in retirement plans). The Stark II final rule rejects this approach and instead indicates that interests in retirement plans, stock options and convertible securities are not ownership or investment interests until the options are exercised or the securities are converted to equity. The Stark II final rule does explain that until they are exercised or converted, stock options and convertible securities constitute compensation arrangements. 42 CFR § 411.354(b)(3).

As was suggested in the preamble to the proposed rule, the Stark II final rule does exclude unsecured loans subordinated to a credit facility from the definition of ownership or investment interests. These unsecured loans are considered compensation arrangements. Id.

Compensation Arrangements

The Stark II final rule defines compensation arrangements in accordance with the statutory language as any arrangement involving remuneration, direct or indirect, between a physician and an entity. 42 CFR § 411.354(c). The Stark II final rule adds that an "under arrangements" contract between a hospital and an entity providing DHS "under arrangements" to the hospital creates a compensation arrangement for purposes of these regulations. 42 CFR § 411.354(c). It does not create an ownership or investment interest. 42 CFR § 411.354(b)(3).

The Stark II final rule adopts special rules on compensation. The first of these special rules deals with when compensation is considered "set in advance." This term is used in many of the compensation arrangement exceptions. Under the final rule, compensation will be considered to be "set in advance" if the aggregate compensation or a time-based or per unit-of-service based (either per-use or per-service) amount is set in advance in the initial agreement between the parties in sufficient detail so that it can be objectively verified. In order to be deemed "set in advance," the payment amount must be fair market value compensation for services or items actually provided, not taking into account the volume or value of referrals or other business generated by the referring physician. The rule goes on to explain that percentage compensation arrangements do not qualify as "set in advance" if the percentage compensation is based on fluctuating or indeterminate measures or in which the arrangement results in the seller receiving different payment amounts for the same service from the same purchaser. 42 CFR § 411.354(d)(1).

The second of these special compensation rules involves the "volume or value of referrals" standard. This standard is also used in many of the compensation exceptions, as well as other places in the statute, such as the group practice definition. According to this special rule, compensation (including time-based or per unit-of-service based compensation) will be considered not to take into account the volume or value of referrals if the compensation is fair market value for services or items actually provided. This compensation must not vary during the course of the compensation agreement in any manner that takes into account referrals of designated health services. 42 CFR § 411.354(d)(2).

A third special rule addresses the "other business generated between the parties" standard that is used in many compensation exceptions. According to the special rule, compensation does not take into account other business generated between the parties as long as the compensation is fair market value and does not vary during the term of the agreement in any manner that takes into account referrals or other business generated by the referring physician including private pay health care business. 42 CFR § 411.354(d)(3).

The last special compensation rule states that a physician's compensation may be conditioned on the physician's referrals to a particular provider, practitioner or supplier, provided certain conditions are met. The compensation must be fixed in advance for the term of the agreement. It must be consistent with fair market value, and it must comply with an exception to the Stark law. Further, the requirement to make referrals to a particular provider must be set forth in writing and signed by the parties. In order to obtain the protection of this special compensation rule, the compensation arrangement must not require the physician to refer to a particular provider if (1) a patient expresses a preference for a different provider, (2) the patient's insurer determines who the provider is, and (3) the referral is not in the patient's best interest. 42 CFR § 411.354(d)(4).

Direct and Indirect Financial Relationships Addressed

One of the troubling aspects of the Stark II proposed rule for health care providers was the manner in which indirect financial relationships were defined and the accompanying discussion of indirect financial relationships in the preamble to the proposed rule. The Stark II proposed rule defined a "financial relationship" as (1) a direct or indirect ownership or investment interest in any entity that exists through equity, debt, or other means and includes any indirect ownership or investment interest no matter how many levels removed from a direct interest, or (2) a compensation arrangement with an entity. The Stark II proposed rule in turn defined a "compensation arrangement" as any arrangement involving any remuneration, direct or indirect, between a physician and an entity. The preamble to the proposed rule explained that an indirect compensation arrangement existed when a physician could receive compensation from an entity even if the payment is funneled through a business or other entity and even if the payment changes form before the physician actually receives it.

The preamble to the Stark II final rule reflects that HCFA recognizes that the proposed rule had adopted very broad interpretations of indirect financial relationships. It also recognizes that the proposed rules pertaining to indirect financial relationships were inconsistent and unclear. In response, in this final rule, HCFA seeks to establish simple bright line tests and to balance the burden of compliance against the risk of abuse the Stark law intended to prevent. 66 Fed. Reg. at 864-865. While the intent behind this effort is commendable, it will continue to be difficult to assure compliance with the resulting regulations.

The Stark II final rule removed the brief definitions of financial relationship and compensation arrangement from the definitions section of the rule and created a new lengthy section addressing financial relationships. 42 CFR § 411.354. Initially, the final rule sets forth that financial relationships include direct or indirect ownership or investments interests and include direct or indirect compensation arrangements. The rule describes that a "direct financial relationship" exists if remuneration passes between the referring physician and the entity furnishing the designated health service without any intervening persons or entities. 42 CFR § 411.354(a)(2). It then provides detailed explanations of "indirect ownership or investment interests" and "indirect compensation arrangements." The Stark II final rule contains significant changes involving indirect financial relationships.

Indirect Ownership or Investment Interests

According to the final rule, indirect ownership or investment interests are deemed to exist between a referring physician and an entity furnishing designated health services if: (1) there is an unbroken chain of persons or entities having ownership or investment interests between them; and (2) the entity furnishing the designated health services has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician has some ownership or investment interest (through any number of intermediary ownership or investment interests) in that entity. The final rule also provides, however, that the entity furnishing the designated health service does not have to know the precise composition of the intervening relationships in order to qualify as an indirect ownership or investment interest. Further, the entity does not have to know the specific terms of the ownership or investment interests related to the intervening persons or entities. 42 CFR § 411.354(b)(5).

Thus, the final rule adds a knowledge element to the definition of indirect ownership or investment interests. This element was added in response to comments that it would be unfair to require entities to try to determine whether any indirect financial relationship existed and risk violating the law due to relationships they knew nothing about. 66 Fed. Reg. at 864. Although not set forth in the rule itself, the preamble does set forth the standard for determining whether an entity has knowledge, or acts in reckless disregard or deliberate ignorance, of an indirect financial relationship. The entity need only know or "have reason to suspect" that the referring physician has some ownership or investment interest in the entity. Id.

The preamble describes this standard as comparable to the scienter standard used in the Civil Monetary Penalties provisions of the Medicare Act. It describes that the standard generally imposes a duty of reasonable inquiry. This duty, however, does not require that the entity inquire as to possible indirect financial relationships. The duty of reasonable inquiry does require that an entity in possession of facts that would lead a reasonable person to suspect the existence of an indirect financial relationship take reasonable steps to determine whether such a relationship exists. The duty further requires that if such an indirect relationship exists, the entity must take reasonable steps to determine whether an exception applies to protect the referral before submitting the claim. 66 Fed. Reg. at 865.

Indirect Compensation Arrangements

The Stark II final rule adopts a three part test to determine whether an indirect compensation arrangement exits. An indirect compensation arrangement exists if: (1) there is an unbroken chain of persons or entities having financial relationships (either ownership or investment interests or compensation arrangements) between the physician and the entity furnishing designated health services; (2) the referring physician receives aggregate compensation from the person or entity in the chain with which the physician has a direct financial relationship that varies with or reflects the volume or value of referrals or other business generated by the referring physician for the entity furnishing the designated health service; and (3) the entity furnishing the designated health services has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with or reflects the volume or value of referrals or other business generated by the referring physician for the entity furnishing the designated health service. 42 CFR § 411.354(c)(2).

The Unbroken Chain

With respect to the first element of the test for indirect compensation arrangements, the preamble to the final rule explains that an unbroken chain of financial relationships is not affected by the form or purpose of the payments or their relationship to the designated health service referrals. For purposes of this portion of the test, it does not matter whether the financial relationships in the chain meet any exception to the ban. 66 Fed. Reg. at 866.

Compensation Based On Referrals Or Other Business

The preamble to the final rule also explains that the second element of the test for indirect compensation arrangements is met when any per service or per use payment arrangement between the physician and the entity with which the physician has a direct financial relationship is based in whole or in part on referrals or other business generated for the entity furnishing the designated health services. It also notes that this portion of the test would be met when any payment is conditioned more generally on referrals or business generated for the designated health service entity.

Notably, however, per service or per use payments that reflect the fair market value for the service or item and that do not vary during the course of the compensation arrangement will not satisfy the second portion of the test and thus will not create indirect compensation arrangements. 66 Fed. Reg. at 866, 42 CFR § 411.354(d)(2) and (3).

The regulation sets forth that, for purposes of the second portion of the test, when the direct financial relationship between the physician and the entity compensating the physician is an ownership or investment interest, the determination whether the referring physician's compensation varies with or reflects the volume or value of referrals or other business will be measured by the nonownership or noninvestment interest closest to the referring physician. 42 CFR § 411.354(c)(2)(ii). The regulation them provides the following example. If a referring physician has an ownership interest in company A, which owns company B, which has a compensation arrangement with company C, which has a compensation arrangement with entity D that furnishes DHS, we will look to the aggregate compensation between company C and company D for purposes" of determining whether the second portion of the test is met. Id. Question why, if the compensation interest to be used is that "closest to the referring physician," does the example state it will look to the compensation between company C and D rather than that between company B and C?

The Knowledge Requirement

The third element of the indirect compensation test is the same knowledge standard included in the test for indirect ownership or investment interests discussed above. The preamble does reflect that the referring physician will be in the best position to know the basis for his or her compensation. Thus, in instances where the entity furnishing designated has reason to suspect an indirect compensation arrangements exists, reasonable inquiry may include obtaining a good faith written assurance from the physician or from the entity from which the physician receives direct compensation that the compensation qualifies for an exception, including the new exception for indirect compensation arrangements discussed below in the section reviewing the new compensation exceptions. 66 Fed. Reg. at 866-867.

Definitions of Designated Health Services Refined

The Stark II law lists eleven categories of designated health services covered by the self-referral prohibition. The Stark II proposed rule added definitions for each of the designated health services. The list of designated health services was compiled by Congress based upon perceived abuses or potential abuses with regard to specific types of services. As a result, the designated health services identified in the Stark law do not exactly track service categories as they are defined under either Medicare or Medicaid. The definitions set forth in the proposed rule included cross references to the Medicare statute, other regulations, and the Medicare Coverage Issues Manual. 66 Fed. Reg. at 922.

In response to comments describing continued confusion over whether specific services fell within a designated health service, the Stark II final rule adds to some of the descriptive definitions by including specific lists of CPT and HCPCS codes. These lists of services constituting designated health services are controlling over the descriptive language. The lists will be updated annually on the HCFA website and as an addendum to the physician fee schedule rule. 66 Fed. Reg. at 922. Included as an attachment to the regulation published in the Federal Register, there are lists of CPT and HCPCS codes for the following designated health services: clinical laboratory services; physical therapy, occupational therapy and speech-language pathology (speech therapy is considered a designated health service as encompassed within occupational therapy); radiology and certain other imaging services (nuclear medicine codes are excluded since not commonly considered radiology); and radiation therapy services and supplies. 66 Fed. Reg. at 963-965.

Although there is no attached list of services for parenteral and enteral nutrients equipment and supplies nor for prosthetics, orthotics, and prosthetic devices and supplies, the definitions included in the regulations now refer directly to HCPCS codes. The definitions of parenteral and enteral equipment and supplies and of prosthetics, orthotics, and prosthetic devices now state that these categories include all HCPCS level 2 codes for these services. Since the definitions include all codes associated with those two categories, HCFA did not believe they needed to be listed in the attachment to the regulation. 66 Fed. Reg. at 933.

Thus, the only designated health services that are not defined by specific codes are durable medical equipment, inpatient and outpatient hospital services, home health services, and outpatient prescription drugs. These services continue to be defined by description only. With the exception of outpatient prescription drugs, the descriptive definitions of these particular designated health services in the Stark II final rule are essentially identical to those included in the Stark II proposed rule (the description of the definition of outpatient hospital services was expanded for consistency with the definition of inpatient hospital services). The definition of outpatient prescription drugs was changed to reflect that it covers all prescription drugs covered by Medicare Part B.

PHASE I MODIFIES GENERAL EXCEPTIONS

In addition to addressing the general prohibition as described above, Phase I of the Stark II final rule also interprets those general exceptions to the prohibition that are applicable to both types of financial relationships (ownership or investment interests and compensation arrangements). The general exceptions include exemptions for physician services, in-office ancillary services, prepaid plans, and a composite rate exception. This Stark II final rule creates new general exceptions for academic medical centers, implants in ambulatory surgery centers, certain drugs furnished in or by an end-stage renal disease facility, preventive screening tests and immunizations, and eyeglasses and contact lenses following cataract surgery. Each of these general exceptions is described below.

Physician Services Exception

The exception for physician services in the statute provides that physician services provided personally by (or under the personal supervision of) another physician in the same group practice as the referring physician are exempted from the self-referral ban. The description of this exception in the Stark II final rule reflects HCFA's current determination of how to handle of independent contractors and employed physicians in the group setting. Under the Stark II final rule, either a physician contractor or an employed physician in the group setting can personally provide the physician service or can supervise the physician service. 42 CFR § 411.355(a). The exception also reflects HCFA's decision to forego setting separate standards for supervision under Stark in favor of already establishing payment and coverage requirements pertaining to supervision levels.

Independent Contractors Can Be "Physicians In the Group" But Are Not "Members of the Group"

The Stark I final rule defined "member of the group" to include physician partners and full-time and part-time physician contractors and employees. In addition to clarifying that group members included other types of ownership interests besides partnerships, the Stark II proposed rule would have excluded physician contractors from the definition of group members. The rationale behind excluding physician contractors reflected a concern that many group practices would have difficulty meeting the group practice requirements if groups had to include specialist contractors whom they utilize on a part time basis. The preamble to the proposed rule reflected that one result of this interpretation to exclude contractors from the definition of group members was that independent contractor physicians could not perform physicians' services under the physicians' services exception without the personal supervision of a group member.

Continuing to be concerned that making independent contractors a "member of the group" would make it difficult for many groups to qualify as a group practice under Stark, HCFA decided to exclude contractor physicians from the newly created definition in the final rule for "member of the group." 42 CFR § 411.351. In order to avoid some of the unwanted effects of such a determination, HCFA concluded, based upon other references in the Stark Act, that independent contractors could be a "physician in the group practice." A "physician in the group practice" is newly defined to include "members of the group" and independent contractor physicians during the time the physician is furnishing patient care services to the group practice's patients on the group's premises under a contractual arrangement with the group. Further, the independent contractor physician must reassign his/her right to payment for services provided to the group in accordance with Medicare's reassignment rules. 42 CFR§ 411.351. As a result of this interpretation, independent contractors can now personally provide physician services or can supervise physician services in accordance with the physician services exception. 66 Fed. Reg. at 879.

Medicare Payment and Coverage Rules Now Determine Level of Supervision

In addition, the Stark II final rule interprets "personal supervision" under the physician services exception differently than the proposed rule. The preamble to the Stark II proposed rule interpreted personal supervision to mean that the group practice physician was legally responsible for monitoring the results of any test or other designated health service and was available to assist the physician who was furnishing the service, even though the group practice physician need not be present while the service was being furnished. The Stark II final rule abandons this interpretation and instead requires only that level of supervision required under the applicable Medicare payment and coverage rules. It was determined that there was no compelling reason to have separate and potentially inconsistent supervision requirements for the Stark exceptions. 66 Fed. Reg. at 879.

The preamble to the Stark II regulations notes that the physician services exception is of limited application. It does provide protection for referrals of those physician services that are included in the definitions of designated health services. For example, some designated health services have a professional and technical component. The physician services exception may be applicable to referrals involving a professional component, such as certain radiology procedures. 66 Fed. Reg. at 879-880. Given the regulators interpretation that nonphysicians (such as physician assistants, nurse practitioners, and clinical nurse specialists) cannot perform "physician services," it is unclear under what, if any, circumstances a physician would be supervising a physician service for purposes of this exception. 66 Fed. Reg. at 880.

The In-Office Ancillary Services Exception

The in-office ancillary services exception as set forth in the Stark Act exempts services personally provided by the referring physician, personally provided by a physician member of the same group practice as the referring physician, or personally by individuals who are directly supervised by the referring physician or another physician in the same group practice. The in-office ancillary services exception also includes a location requirement and a billing requirement.

This exception, which is probably the most important single exception in the Stark law, not surprisingly generated the most comments from the health care community. The Stark II final rule makes significant changes to the in-office ancillary services exception including eliminating the direct supervision requirement, allowing independent contractor physicians to provide the required level of supervision, redefining what constitutes the "same building," and specifically allowing group practices to use mobile diagnostic units.

Direct Supervision Requirement Eliminated

Pursuant to the Act, the in-office ancillary services exception allows for the exemption of services performed by nonphysicians as long as these services are "directly supervised" by the referring physician or another physician in the group practice. The Stark II proposed rule adopted the definition of "direct supervision" utilized in the "incident to" rules which requires supervision by a physician who is present in the office suite and immediately available to provide assistance and direction throughout the time services are being performed. The proposed regulation would have added that "present in the office suite" means that the physician must be actually physically present in the office suite, but that a physician would still be considered "present" during brief and unexpected absences as well as during routine absences of short duration, such as a lunch break.

It was recognized that physicians who were directly supervising nonphysicians in accordance with the in-office ancillary services exception still had to comply with any other Medicare requirements related to supervision. In order to avoid conflict or confusion over the level of supervision required, the Stark II final rule drops the direct supervision requirement and replaces it with reference to the appropriate level of supervision under the Medicare payment and coverage rules. 42 CFR § 411.355(b)(1)(iii). In eliminating the direct supervision requirement from the in-office ancillary services exception, HCFA determined that Congress did not intend to require direct supervision as set forth in the "incident to" rules, but instead was seeking to establish a nexus between the referring physician and the person performing the services to make sure they were truly ancillary. HCFA decided to defer to existing supervision requirements to establish this nexus. 66 Fed. Reg. at 886.

Independent Contractors Can Provide Required Level of Supervision

As described above in connection with the physician services exception, HCFA struggled to decide how best to handle independent contractor physicians in the group setting. As noted, under the final rule, independent contractors cannot qualify as a "member of the group" but can be a "physician in the group." This distinction allows contractor physicians working for a group to supervise designated health services under the in-office ancillary services exception without making it difficult for the group to qualify as a group practice. 66 Fed. Reg. at 881, 885.

Location Requirements Modified

The location requirement in the in-office ancillary services exception mandates that the designated health services must be furnished (1) in a building in which the referring physician or another group practice member furnishes services unrelated to designated health services; (2) in a building that is used by the group for the provision of some or all of it's clinical laboratory services; or (3) in a building that is used by the group for the centralized provision of the group's designated health services.

Same Building Requirements Tightened

The Stark II proposed rule added the word "same" before building under the first option and defined "same building" in the regulation to mean the same physical structure, with one address, and not multiple structures connected by tunnels or walkways. In an effort to simplify the regulation and avoid questions of architectural design, the Stark II final now defines the "same building" as a structure or combination of structures with a single street address assigned by the postal service. The definition specifically excludes interior parking garages and all exterior spaces such as, lawns, courtyards, driveways, and parking lots. The definition of "same building" also specifies that mobile vans and trailers are excluded from the definition. 42 CFR § 411.351; 66 Fed. Reg. at 888. The preamble explains that a building consists of usable professional office space and common areas such as lobbies, corridors, elevator banks, and restrooms. 66 Fed. Reg. at 890. The regulators recommend that questions pertaining to whether the same building standard is met can be addressed by seeking a Stark advisory opinion. 66 Fed. Reg. at 889.

The Stark II final rule also revises the regulation to add the requirement that the services must be provided in the same building in which the group or physician routinely provides the full range of the group's or the physician's medical services. 42 CFR § 411.355(b)(2)(i)(B). The full range of services language was added to limit the ability of group practices to use part-time arrangements to provide designated health services in buildings or facilities in which they do not routinely provide a wide range of services other than designated health services. 66 Fed. Reg. at 881.

In addition, the Stark II final rule adds the term "substantial" physician services to the requirement that services unrelated to the furnishing of designated health services be furnished in the same building. 42 CFR § 411.355(b)(2)(i)(A).

The preamble describes this additional requirement as closing a loophole to prevent physicians and groups from operating designated health services enterprises that are only marginally connected to their medical practices. 66 Fed. Reg. at 888.

In addition to the substantial physician services and full range of services elements, the Stark II final rule also makes the same building requirement even harder to achieve by adding yet another element. The new requirement mandates that the designated health services furnished must be furnished to patients whose primary nexus with the referring physician is the receipt of physician services unrelated to the furnishing of the designated health service. 42 CFR § 411.355(b)(2)(i)(C). The preamble points out that obtaining the designated health service should not be the main reason that the patient has contact with the referring physician. This requirement was added to ensure that the designated health services provided are truly ancillary services and not primary services for the patients who receive them. 66 Fed. Reg. at 888. The preamble does state that for purposes of this exception, services "unrelated to the furnishing of designated health services" are physician services that are neither Federal nor private pay designated health services. These physician services are still considered to be "unrelated" even if the services might generate orders or referrals for designated health services. Two examples are provided for clarification. In the first, a cardiologist examines a patient and thereafter orders a diagnostic radiology test. This would be considered a service "unrelated to the furnishing of designated health services." In the second example, a cardiologist who reads the results of a diagnostic radiology test is considered to have performed a service that is related to the furnishing of designated health services. 66 Fed. Reg. at 890.

Centralized Building Requirements Tightened

Under the Stark II proposed rule, a location could meet the centralized building requirement if it serviced more than one of a group's offices, and if it furnished one or any combination of designated health services. Further, under the proposed rule, the group would have to have at least one physician member present at the centralized location to perform or directly supervise the performance of the designated health services, but that physician would not be required to perform physician services unrelated to designated health services at the centralized location.

The Stark II final rule makes the centralized location requirement significantly more difficult to meet. The Stark II final rule adds a definition of centralized building that requires all or part of the building to be used exclusively by the group on a full-time basis for at least six months. The location must be wholly owned or leased by the group practice 24 hours a day, 7 days a week. The definition specifically excludes space that is shared by more than one group practice or by a group and another provider. 42 CFR § 411.351. This change was designed to prohibit part-time arrangements and sharing of facilities by numerous groups which HCFA feels circumvent the statutory intent behind the exception. 66 Fed. Reg. at 889.

Interestingly, a mobile vehicle, van, or trailer that is owned or leased by a group on a full-time basis can qualify as a centralized building under the new regulation. 42 CFR § 411.351. Despite concerns that mobile services are susceptible to fraud and abuse, HCFA is willing to allow groups to utilize mobile units for purposes of transporting equipment between group locations. The additional requirements regarding exclusive full time are intended to avoid the potential for part time rentals of free-standing, money-making ventures not central to the group's practice. 66 Fed. Reg. at 891.

The Stark II final rule does adopt the interpretation from the proposed rule that a group can have more than one centralized location. 42 CFR § 411.351. The preamble to the Stark II final rule, however, does not adopt the interpretation from the proposed rule that the centralized location would have to service more than one of the group's offices. Instead, the preamble to the final rule provides that even groups with one location can provide designated health services at another centralized location. 66 Fed. Reg. at 892.

Billing Requirements

In order to qualify for the in-office ancillary services exception, the services must be billed by (1) the physician performing or supervising the service; (2) the group practice of which the performing or supervising physician is a member under a billing number assigned to the group; or (3) an entity that is wholly owned by the physician or the physician's group practice.

In addition to these statutory requirements, the Stark II final rule adds that a group practice can bill for services provided by independent contractor physicians as a "physician in the group" under a billing number assigned to the group. It clarifies that wholly owned entities can bill under the wholly owned entity's own billing number or under a billing number assigned to the physician or group practice. It also adds that an independent third party billing company acting as an agent can bill under a billing number assigned to the physician, group, or wholly owned entity provided the Medicare reassignment rules are followed. 42 CFR § 411.355(b)(3).

Home Care Physicians Can Rely On In-Office Ancillary Services Exception

The Stark II final rule creates a special rule under the in-office ancillary services exception for home care physicians. Specifically, this special rule states that home care physicians whose principal medical practice consists of treating patients in their private homes can meet the same building requirement if the physician (or accompanying staff member) provides a designated health service contemporaneously with a physician service that is not a designated health service. 42 CFR § 411.355(b)(6). Thus, provided all of the other requirements are met, physicians providing home care services can utilize the in-office ancillary services exception. This is a change from the proposed rule which would have excluded services furnished at home from eligibility for the in-office ancillary services exception. HCFA is soliciting comments on whether home care physicians require additional special rules. 66 Fed. Reg. at 888.

Other Items Meant To Be Used At HomeCan Also Qualify For Exception

The preamble to the Stark II proposed rule discussed the requirement that designated health services must be "furnished" in one of the specified locations to qualify for the in-office ancillary services rule. Under the interpretation set forth in the preamble to the proposed rule, services given to a patient to be used at home or outside the physician's office would not be considered to have been furnished in the physician's office and could not qualify for the in-office ancillary services exception.

In response to concerns that such an interpretation could disqualify chemotherapy drugs from protection under the in-office ancillary services exception, the Stark II final rule specifically includes a provision that explains that a service is "furnished" where it is actually performed or where an item is dispensed to a patient. 42 U.S.C. § 411.355(b)(5). The preamble to the final rule clarifies that chemotherapy infusion drugs may be protected by the in-office ancillary services exception if they are administered or dispensed to patients in the referring physician's office or through the referring physician's group. 66 Fed. Reg. at 882.

Shared Facilities In Same Building

Although the Stark II final rule does not adopt a shared facilities exception, it does reflect, as first suggested in the Stark I final rule, that physicians who share facilities in the "same building" but are not a group practice may still rely on the in-office ancillary services exception if all of the other requirements are met. 66 Fed. Reg. at 888. The Stark II final rule also makes clear that shared facilities in another building will not qualify as a centralized location and cannot qualify for the in-office ancillary services exception. 66 Fed. Reg. at 893.

Certain Items Of DME Receive Special Treatment

The statutory exception for in-office ancillary services specifically excludes durable medical equipment (except for infusion pumps) and parenteral and enteral nutrients, equipment and supplies from protection under the exception. In the Stark II proposed rule, HCFA added a specific category to the in-office ancillary services exception for crutches (which would not otherwise qualify for the exception since they are durable medical equipment). Under the proposed rule, physicians who wanted to rely on the in-office ancillary services exception to protect their provision of crutches could not realize a direct or indirect profit for furnishing the crutches to a patient. The Stark II expands this carve out to include canes, crutches, walkers and folding manual wheelchairs, and blood glucose monitors. It also drops the requirement that the physician not realize any profit for furnishing these items of durable medical equipment. In order to qualify for this carve out, certain additional requirements must be met. For example, the item must be needed for the purpose of ambulating to leave the doctor's office. In the case of blood glucose monitors, it may only be furnished by a physician or group that also furnishes outpatient diabetes self-management training to the patient. 42 CFR § 411.355(b)(4).

The Group Practice Definition

Both the physician services exception and the in-office ancillary services exception refer to group practices and to members of the group practice or physicians in the group practice. In order for any group of physicians to take advantage of these exceptions, the group must qualify as a group practice under the Stark definition.

After the publication of the Stark II proposed rule, there was a great deal of concern that HCFA was trying to micro-manage group practices. In particular, the unified business test and the limitations imposed upon physician compensation were considered unnecessarily intrusive into the day to day management and operation of physician group practices. In response to the many criticisms related to the group practice definition, HCFA has attempted to minimize the impact on common group practices through adoption of the revised standards in this final rule. 66 Fed. Reg. at 860-861.

Two or More Physicians Legally Organized

A group practice is defined in the statute as a group of two or more physicians legally organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan, or similar association. The Stark II proposed rule would have amended the definition to include that a group can consist of physicians who are individually incorporated as professional corporations. It would, however, have excluded practices in which one physician holds 100% of the ownership interests but employs a number of physicians. The Stark II final rule broadens the types of arrangements that can qualify as a single legal entity of two or more physicians. For example, they can now include multi-entity legal structures and structures owned by a single physician. 66 Fed. Reg. at 895. In fact, they can now include legal structures with no physician ownership. 66 Fed. Reg. at 897.

The group practice definition has been modified in the Stark II final rule to reflect that a group practice must be a single legal entity formed primarily for the purpose of being a physician group practice in any recognized organizational form. It specifies that informal affiliations of physicians formed substantially to share profits from referrals will not constitute a single legal entity. Nor will separate group practices under common ownership or control through a physician practice management company, hospital, or health system. A single legal entity may not be organized or owned by another medical practice that is an operating practice. 42 CFR § 411.352(a).

The preamble to the final rule contains of list of legal structures that may qualify as a single legal entity. This list includes: a partnership between two or more physicians; a partnership between one physician and another party (as long as the partnership employs at least one other physician); a corporation or limited liability company with one or more physician shareholders or members (corporations or limited liability companies with only one physician shareholder or member must employ at least one other physician); a corporation or limited liability company owned by nonphysicians as long as it employs at least two physicians; a single legal entity owned by two or more physicians through their individual professional corporations; a solo practitioner who is organized as a legal entity (such as a professional corporation) and who employs at least one other full-time physician; and a single legal entity owned by one or more other legal entities that involves two or more physicians through employment or indirect ownership. 66 Fed. Reg. at 897.

In making these changes, HCFA explains that the group practice definition in the statute can reasonably be read to mean that a group may be owned by virtually any combination of individuals or other entities as long as there are at least two physicians providing services to patients as group practitioners. 66 Fed. Reg. at 898. For example, friendly or captive professional corporations that are formed by non-practicing physicians in corporate practice of medicine states must employ at least two other physicians to qualify as a group practice. 66 Fed. Reg. at 903.

Full Range of Services and Substantially All Tests

In order to qualify as a group practice, the statute requires that each physician who is a member of the group must furnish substantially the "full range of services" that the physician routinely furnishes through the joint use of shared office space, facilities, equipment and personnel. The group practice definition also requires that "substantially all" of the services of physicians who are members of the group are provided through the group, billed in the name of the group, and amounts received treated as receipts of the group.

The Stark II proposed rule set forth that the services referenced in the full range of services test and the substantially all tests are patient care services. The proposed rule also established that the substantially all test meant at least 75% of total patient care services. The proposed rule interpreted patient care services to extend to tasks that address the medical needs of patients in general or that generally benefit the practice. It reflected that patient care services were to be measured by the total patient care time each group member spent on these services.

The Stark II final rule adopts the full range of services and substantially all requirements from the proposed rule. It then addresses how to measure patient care services for purposes of the 75% requirement in the substantially all test. The final rule states that patient care services must be measured either by (1) the total time each member spends on patient care services documented by any reasonable means (including, but not limited to, time cards, appointment schedules or personal diaries) or (2) any alternative measure that is reasonable, fixed in advance of the performance of the services being measured, uniformly applied over time, verifiable and documented. 42 CFR § 411.352(d). Since independent contractors are not members of the group, their patient care services do not have to be measured for the substantially all test. 66 Fed. Reg. at 904.

The Stark II rule does address for the first time how new groups must deal with the substantially all test. The definition of group practice includes a provision that during a new group's start up period, it must make a reasonable good faith effort to meet the substantially all test. The start up period can not last longer than 12 months from the initial formation of a new group practice. This start up grace period is for new groups only and not for new members admitted to existing groups. 42 CFR § 411.352.

Members of the Group

As described above, the Stark II final rule excludes independent contractor physicians from the definition of "members of the group." Similarly, leased employees are not included as members of the group. Members of the group do include direct or indirect physician owners (including physicians whose ownership interest in the group is held by the physician's professional corporation or other type of entity). Members of the group include physician employees (including physicians who are employed by entities which own the group). Locum tenens physicians and on-call physicians are also considered members of the group. A physician will be considered a member of the group during the time the physician furnishes patient care services to the group. 42 CFR § 411.351; 66 Fed. Reg. at 903.

The Unified Business Test Is Softened

In order to qualify as a group practice under the statutory definition, the practice's overhead expenses and income must be distributed in accordance with methods previously determined by members of the group. Under the Stark II proposed rule, the distribution methods had to be determined before the group earned the income. The Stark II final rule changes this to reflect that the distribution methods need only be determined before the group receives payment for the services. In addition, the Stark II final rule adds that groups can adjust their compensation methodologies prospectively as long as they comply with the requirements for the payment of productivity bonuses and profit sharing described below. 66 Fed. Reg. at 957.

The Stark II proposed rule sought to add an additional component to the group practice definition that would require that overhead expenses and practice income be distributed according to methods that indicate that the practice is a "unified business." The proposed rule stated that the distribution methods must reflect centralized decision making, pooling of expenses and revenues, and a distribution system that does not treat each satellite office as if it were a separate enterprise.

The proposed unified business test received a great deal of criticism from those who submitted comments. It was felt that the test invalidated many bona fide and common group practice compensation structures. It was thought to discourage beneficial integration of group practices. In response, the Stark II final rule attempts to provide groups with greater flexibility by significantly changing the unified business test. 66 Fed. Reg. at 906.

The new unified business test incorporated into the group practice definition requires that groups (1) engage in centralized decision making by a body that maintains effective control over the group's assets and liabilities; (2) consolidate billing, accounting, and financial reporting; and (3) centralize utilization review. The unified business test under the Stark II final rule now specifically allows for location and specialty-based compensation practices with respect to revenues derived from services that are not designated health services and with respect to revenues derived from designated health services in accordance with the rules on productivity bonuses and profit sharing. 42 CFR § 411.352(f). The new rule will permit many forms of cost center and location-based accounting that would have been prohibited by the proposed rule. It is also intended to provide groups with the flexibility to respond to changing circumstances. 66 Fed. Reg. at 906.

Volume or Value or Referrals

The Stark Act prohibits physicians in a group practice from directly or indirectly receiving compensation based upon the volume or value of their referrals. According to the preamble to the Stark II proposed rule, compensation could be based on units of service as long as the units of service did not include services provided to patients who were referred by the physician receiving the payment. The Stark II final regulation revisits this interpretation of the volume or value standard. It now specifically allows for time-based or unit-of-service based payments, even when the physician receiving the payment has generated the payment through a designated health service referral. Furthermore, the regulation reflects that its current interpretation applies uniformly to all references to the volume or value standard. The volume or value standard is included in many of the exceptions to the prohibition. 66 Fed. Reg. at 876-877.

Productivity Bonuses and Profit Sharing

As noted, the Stark Act prohibits physicians in a group practice from directly receiving compensation based upon the volume or value of their referrals. The Act created a special rule that would allow a physician in a group practice to be paid a share of overall profits of the group, or a productivity bonus based on services personally performed or services incident to such personally performed services, as long as the share or bonus was not determined in any manner which is directly related to the volume or value of referrals by the physician.

According to the Stark II proposed rule, a group practice could not compensate its members based on the volume or value of referrals for designated health services for Medicare or Medicaid patients, but could do so for other services or other patients. Under the proposed rule, a physician in the group could receive a portion of the group's overall pooled revenues from services which constitute a referral of a Medicare/Medicaid patient for a designated health service, as long as the portion was not determined in a manner that directly relates to who made the referrals. The preamble to the proposed rule provided examples of the ways in which such profits can be shared appropriately: based on an even split, based on a physician's investment in the group, based on the number of hours the physician devotes to the group, or based on the difficulty of the physician's work. The preamble required pooling of profits on a group wide basis and stated that any narrower pooling base, such as pooling based on subspecialty group or satellite locations, would be inappropriate.

Under the proposed rule, a productivity bonus could not count the performance of designated health services provided to Medicare or Medicaid patients that the physician self-refers, i.e. orders. A productivity bonus could include compensation for designated health services provided to Medicare or Medicaid patients that the physician personally performs or that are incident to the services the physician directly supervises, as long as the services resulted from the referral of another physician.

These proposed rules pertaining to physician compensation were criticized as burdensome, intrusive, and contrary to the statutory intent. HCFA agreed that the proposed interpretation was unnecessarily restrictive. The Stark II final rule amends these requirements in an effort to avoid unduly interfering in physician compensation beyond what is necessary under the Stark Act.

Under the Stark II final rule, group practices may pay member physicians and independent contractors who are "physicians in the group" a share of overall profits. Overall profits are defined as (1) the group's entire profits derived from designated health services payable by Medicare or Medicaid or (2) the profits derived from designated health services payable by Medicare or Medicaid of any component of the group practice that consists of at least 5 physicians. 42 CFR § 411.352(i)(2). This allows for profits to be pooled on a basis narrower than a group wide pooling as long as the pooling includes at least 5 physicians.

The Stark II final rule does state that the share may not be directly related to the volume or value of referrals of designated health services by the physician. 42 CFR § 411.352(i). It goes on to set forth when shares of overall profits will be considered not to directly relate to the volume or value of referrals. Profits are not directly related to referrals if (1) the group's profits are divided per capita; (2) revenues derived from designated health services are distributed based on the distribution of group practice revenues attributable to services that are not designated health services; (3) revenues derived from designated health services constitute less than 5% of the group practice's total revenues and the portion allocated to each physician constitutes 5% or less of the physician's total compensation from the group; or (4) overall profits are divided in a reasonable and verifiable manner that is not directly related to the volume or value of the physician's referrals of designated health services. 42 CFR § 411.352(i)(2).

Under the Stark II final rule, group practices may pay member physicians and independent contractors who are "physicians in the group" productivity bonuses based on the physician's personal productivity. Personal productivity bonuses can even be based on services incident to those personally performed services. They may not be based on referrals for designated health services that are performed by someone else. 42 CFR § 411.352(i); 66 Fed. Reg. at 908.

The rule does state that the productivity bonus may not be directly related to the volume or value of referrals of designated health services by the physician. It goes on to list when a productivity bonus will be considered not to directly relate to the volume or value of referrals. Productivity bonuses do not directly relate to referrals if (1) the bonus is based on the physician's total patient encounters; (2) the bonus is based on the allocation of the physician's compensation attributable to services that are not designated health services; (3) revenues derived from designated health services constitute less than 5% of the group practice's total revenues and the portion allocated to each physician constitutes 5% or less of the physician's total compensation from the group; or (4) the bonus is calculated in a reasonable and verifiable manner that is not directly related to the volume or value of the physician's referrals of designated health services. 42 CFR § 411.352(i)(3).

Thus, in addition to being less restrictive, the Stark II final rule provides a road map for group practices that are trying to make sure that the compensation they pay physicians complies with the requirements of the Act. The final rule also provides for greater flexibility in that it still allows for groups to structure their own compensation structures provided they are reasonable and verifiable.

Group Practice Attestation Abandoned

The Stark I final rule included a requirement that a physician group wishing to rely upon qualification as a group practice under the Stark laws must submit an attestation statement that it qualifies (or for new groups will qualify) as a group practice under Stark. The Stark II proposed rule added that the attestation statement must be signed by an authorized representative of the group, must contain a statement that the information furnished is true and accurate to the best of the representative's knowledge and belief, and specify that any person filing a false statement will be subject to applicable criminal and/or civil penalties. Attestation statements were to be submitted no later than 60 days after receipt of attestation instructions from the group's carrier.

The Stark II final rule abandons the group practice attestation requirement altogether. HCFA determined that the attestation requirement would impose an undue burden on group practices. The preamble reflects that groups will be allowed to treat the information they need to establish they are a group in the same manner as any information that an entity must provide under the reporting requirements. 66 Fed. Reg. at 910.

The reporting requirements are included in the Stark Act. The statute provides that each entity providing covered items or services for which payment may be made under Medicare shall provide the Secretary with information concerning the entity's ownership, investment and compensation arrangements. The preamble does reflect that HCFA intends to develop a streamlined reporting system that does not require entities to retain and submit large quantities of data. It reflects that entities should maintain enough records to show, in the event of an audit, that particular relationships are excepted from the ban. 66 Fed. Reg. at 911.

The Prepaid Plan Exception

In addition to the physician services and in-office ancillary services exception, there is a general exception for prepaid plans. The prepaid plan exception exempts services provided by health maintenance organizations and competitive medical plans that have contracts with Medicare, certain prepaid organizations functioning under a demonstration project, and Federally qualified health maintenance organizations. As a result of the creation of the Medicare+Choice Program, the Stark regulations were amended in June 1998 to exempt services furnished to prepaid enrollees by a coordinated care plan. This exemption is now covered under the exception for prepaid plans. 42 CFR § 411.355(c).

The preamble to the Stark II proposed rule reflected HCFA's intent to interpret this exception broadly to include physicians, providers, or suppliers that contract with these prepaid plans for the provision of services to their enrollees. HCFA interpreted the exception to also encompass physicians, providers or suppliers with whom the contracting physicians, providers or suppliers have subcontracted to provide services to the prepaid plan's enrollees. The Stark II final rule adopts this interpretation in the final rule and specifies that it covers contractors and subcontractors of prepaid plans.

The Stark II proposed regulation would also add a prepaid plan exception for services furnished to Medicaid enrollees analogous to that available for Medicare managed care plans. This exemption will be addressed in Phase II of the rulemaking.

The Composite Rate Exception

The Stark I final rule created an exception for laboratory services furnished in an ambulatory surgical center (ASC), end stage renal disease facility (ESRD), or by a hospice provided the services were included within a composite rate. These services were excepted because they are furnished as part of a composite rate that cannot vary in response to utilization. The Stark II proposed rule adopted this exception for all designated health services.

The Stark II final rule maintains the composite rate exception for clinical laboratory services only. 42 CFR § 411.355(d). There is discussion in the preamble to the Stark II final rule that it was determined that services that would otherwise constitute designated health services that were paid by Medicare as part of composite payment (such as the ambulatory surgery center rate) would not be deemed designated health services for purposes of the Act. 66 Fed. Reg. at 923. Given this determination, it was decided not to adopt the extension of the composite rate exception to all designated health services as it was unnecessary. Although under Phase I of the Stark II final rule the composite rate exception still exists for laboratory services, the preamble reflects that it may be eliminated entirely in Phase II. 66 Fed. Reg. at 924.

NEW GENERAL EXCEPTIONS CREATED BY FINAL RULE

In Phase I, a number of new exceptions were created that apply to both ownership or investment interests and compensation arrangements. These exceptions exempt services provided in academic medical centers, implants provided in ambulatory surgical centers, dialysis related drugs furnished in an end-stage renal disease facility, preventive screening and immunizations, and eyeglasses and contact lenses after cataract surgery.

Academic Medical Center Exception

Recognizing that academic medical centers often involve multiple affiliated entities that may make qualifying for an existing exception difficult, the Stark II final rule adds a new general exception for academic medical centers. Services provided in an academic medical center are exempt from the self-referral ban provided they meet all the requisite conditions. For example, the referring physician must be a bona fide employee of the medical center on a full-time or substantial part-time basis. The physician must have a bona fide faculty appointment and provide substantial academic or clinical teaching services. The physician's total compensation must be set in advance, not exceed fair market value, not take into account the volume or value of referrals or other business generated, and not violate the anti-kickback statute. Additional requirements regarding the composition of the medical center and relationships between the components of the medical center apply. 42 CFR § 411.355(e).

Exception For Implants At ASCs

The Stark II final rule also creates an exception for implants, including but not limited to cochlear implants, intraocular lenses, and other implanted prosthetics, implanted prosthetic devices and implanted durable medical equipment furnished by the referring physician or a member of the group practice in a Medicare certified ambulatory surgery center ("ASC"). Since implants are not included in the bundled ASC payment and there may be no other exception that would apply for surgeons who have an ownership interest in an ASC, there was concern that without an exception, the services would have to be performed in more costly hospital settings.

In order to qualify for the exception, the implant must be implanted during a surgical procedure performed in the same ASC. The arrangement cannot violate the anti-kickback statute and must comply with billing and claims submission requirements for implants. The exception only applies to the financial relationship between the referring physician and the ASC. 42 CFR § 411.355(f).

Exception for EPO and Dialysis Related Drugs

A new exception was also created to exempt EPO and other dialysis related drugs furnished in an end stage renal disease (ESRD) facility. The other dialysis related drugs covered by the exception are listed as an attachment to the final rule and will be updated annually on the HCFA website and in the Federal Register. The requirements for this new exception are similar to the new exception for implants. The drugs must be furnished in an ESRD facility. The arrangement cannot violate the anti-kickback statute and must comply with billing and claims submission requirements for the drugs. The exception only applies to the financial relationship between the referring physician and the ESRD facility. 42 CFR § 411.355(g).

Exception for Preventive Screening Tests and Immunizations

A new general exception has been added for preventive screening tests, immunizations and vaccines that are covered by Medicare, subject to HCFA mandated frequency limits and reimbursed on the basis of a fee schedule. The services covered by this exception are listed as an attachment to the final rule and will be updated annually on the HCFA website and in the Federal Register. Here again the arrangement cannot violate the anti-kickback statute and must comply with billing and claims submission requirements. 42 CFR § 411.355(h).

Exception for Eyeglasses and Contact Lenses

The final new general exception is an exception for eyeglasses and contact lenses covered by Medicare after cataract surgery. A special exception was created due to the unique coverage rules pertaining to these items. Coverage is limited to one pair of either glasses or contacts after each cataract surgery and is available to anyone who has the surgery. There is little fear of overutilization in these circumstances. 66 Fed. Reg. at 936.

In order to qualify for the exception, the glasses or contacts must be provided in accordance with coverage and payment procedures. The arrangement cannot violate the anti-kickback statute and it must comply with billing and claims submission requirements. 42 CFR § 411.355(i).

With the exception of the new exemption for academic medical centers, each of the new general exceptions was added based upon the limited likelihood that the particular item or service would be overutilized. Despite adding these new very specific exceptions, the preamble indicates that it was not the intent of Congress to regulate on a case by case basis after considering the likelihood of overutilization. These few new exceptions were added not simply because they posed limited risk of abuse, but in order to avoid needless disruption of patient care. 66 Fed. Reg. at 923.

NEW COMPENSATION ARRANGEMENTS EXCEPTIONS

New Exception for Indirect Compensation Arrangements

The regulators recognized that many indirect compensation arrangements may not fit easily into existing exceptions which were drafted with direct compensation arrangements in mind. As a result, the Stark II final rule adds an exception for indirect compensation arrangements. In order to qualify for this new exception, the following requirements must be met. First, the compensation received by the physician as a result of the indirect compensation arrangement must be the fair market value for the services and items actually provided. The compensation cannot take into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing the designated health services. Second, the compensation arrangement must be set out in writing, signed by the parties, and specify the services covered by the arrangement. In cases of bona fide employment relationships, the arrangement does not have to be set out in writing, but it must be for identifiable services and must be commercially reasonable even if no referrals are made to the employer. Third, the compensation arrangement must not violate the anti-kickback statute or any laws or regulations governing billing or claims submission. 42 CFR § 411.357(p).

Fair Market Value Compensation Exception

The Stark II proposed rule set forth a new exception for compensation arrangements that reflect fair market value. The Stark II final rule adopts this new exception with certain changes as noted. In order to qualify for the fair market value exception, specific conditions must be met. The arrangement must be set forth in an agreement that is in writing, signed by the parties, and covers only identifiable items or services, which as added by the Stark II final rule, must be specified in the agreement. The Stark II final rule dropped the requirement that the agreement contain a cross reference to any other agreements for items or services between the parties. The agreement must specify a time frame for the arrangement (which can be for any period of time and which may contain a termination clause) provided the parties enter into only one arrangement for the same items or services during the course of a year. However, an arrangement that is made for less than one year may be renewed any number of times if the terms of the arrangement and the compensation for the same items and services do not change. The agreement must specify the compensation that will be provided under the arrangement. The compensation, must be set in advance and be consistent with fair market value. The compensation may not be determined in a manner that takes into account the volume or value of any referrals or any other business generated between the parties. The transaction must be commercially reasonable and must further the legitimate business purposes of the parties. Finally, the agreement must meet a safe harbor under the anti-kickback statue or not violate the anti-kickback statute. The Stark II final rule adds that approval by the OIG under a favorable advisory opinion is also acceptable. The Stark II final rule also added that the services to be performed cannot involve the counseling or promotion of a business arrangement or other activity that violates the law. 42 CFR § 411.357(l).

The preamble to the Stark II final rule clarifies that one can rely on the fair market value exception even if another exception could apply. It reminds that the fair market value exception only covers items and services provided by a physician to an entity. It does not cover items and services provided by an entity to a physician. There is already a compensation exception that covers this situation. 66 Fed. Reg. at 919.

HCFA discusses how to determine whether an arrangement is "commercially reasonable" for purposes of the fair market value exception. The preamble states that any reasonable method of valuation is acceptable. It notes that the determination should be based on the specific business the parties are in and not business in general. The regulators strongly suggest that the parties maintain good documentation supporting valuation. It can be expected that this discussion should be equally applicable to references to "commercially reasonable" in the other existing compensation arrangement exceptions that will be addressed in Phase II of the rulemaking. 66 Fed. Reg. at 918-919.

De Minimis Compensation Exception Renamed

The Stark II proposed regulation added a new compensation exception for de minimis compensation. The Stark II final rule adopts this exception with certain changes. The name of the exception is changed to the non-monetary compensation up to $300 exception. This exception provides that compensation in the form of items or services (not including cash or cash equivalents) that does not exceed an aggregate of $300 per year is excepted from the ban. The Stark II final rule dropped that portion of the proposed rule that would have created a $50 per gift limit. It also dropped the requirement that the entity providing the compensation make it available to all similarly situated individuals, regardless of whether they refer patients to the entity or not. The final rule retained the requirement that the compensation is not determined in any way that takes into account the volume or value of the physician's referrals to the entity and added that the compensation may not be solicited by the physician or the physician's practice. The final rule also added the requirement that the compensation not violate the anti-kickback statute. 42 CFR § 411.357(k).

HCFA did raise the possibility that a separate exception could be developed for professional courtesies. It is soliciting comments regarding how to define professional courtesy and what requirements should be included in a professional courtesy exception. 66 Fed. Reg. at 922.

New Exception for Medical Staff Incidental Benefits

Along the same lines as the exception formerly known as the de minimis exception, the Stark II final rule creates an exception for medical staff incidental benefits. The new exception is designed to allow incidental benefits of low value provided by hospitals to their medical staffs. In order to qualify for this exception, the compensation can not be in the form of cash or cash equivalents. The item or service provided by the hospital must be used on the hospital's campus. The compensation must be offered to all members of the medical staff without regard to the volume or value of referrals or other business generated between the parties. The compensation can only be offered when a staff member is making rounds or performing other duties that benefit the hospital or its patients. It must be reasonably related to the provision medical services at the hospital. It must be consistent with the types of benefits offered by other hospitals in the region, and must be of low value (less than $25.00). Finally, it must not violate the anti-kickback statute. 42 CFR § 411.357(m).

New Exception for Risk-Sharing Arrangements

The Stark II final rule also creates a new compensation exception for certain risk-sharing arrangements. The exception protects compensation pursuant to a risk-sharing arrangement between a managed care organization or an independent physicians association and a physician (either directly or indirectly through a subcontractor) for services provided to enrollees of a health plan. The arrangement cannot violate the anti-kickback statute or any law or regulation governing billing or claims submission. 42 CFR § 411.357(n). This exception was created in response to concerns that the self-referral prohibition would require wholesale restructuring of commercial managed care arrangements with physicians. 66 Fed. Reg. at 913.

New Exception for Compliance Training

HCFA recognizes that hospitals who offer compliance training programs for physicians on their medical staffs or in the community are providing a beneficial service. Since such programs do not pose a risk of fraud or abuse, the final rule creates an exemption for compliance training provided by a hospital to a physician who practices in the hospital's local community or service area. The training must be held in the community or service area. It may consist of training regarding the basic elements of a compliance program or specific training regarding the requirements of Federal health care programs. 42 CFR § 411.357(n); 66 Fed. Reg. at 921.

HOME HEALTH CERTIFICATION REQUIREMENTS

The certification requirements for home health services are set forth at 42 CFR § 424.22(d). Previously, the home health regulations prohibited a physician who has a significant ownership interest in or a significant contractual or financial relationship (including salaried employment) with a home health agency from certifying the need for home health services or establishing and reviewing a home health plan of care for the agency. In the home health context, significant ownership interests and significant financial relationships are defined on the basis of percentage of ownership and specific dollar values.

In contrast, the Stark ban does not establish a specific level of ownership interest or compensation amounts in order to trigger the ban. In order to avoid any confusion that the conflicting provisions could cause, the final rule adopts the decision in the Stark II proposed regulation to use the Stark definition of financial relationship to replace the concept of significant ownership interest in or significant financial or contractual relationship with a home health agency in the home health agency regulations. As a result 42 CFR § 424.22(d) has been amended to reflect that a physician cannot certify or recertify a patient's need to receive home health services from an agency if the physician has a financial relationship with that agency as defined under the Stark regulations, unless that financial relationship meets one of the Stark exceptions.

As noted, the only portion of Phase I of this rulemaking that is effective earlier than one year from the date of publication relates to the home health certification requirements. This portion of the rule is effective on February 5, 2001.

REFERENCE TO PRIMARY SANCTIONS

Stark II provides for imposition of the following sanctions: denial of payment, refund of payment, imposition of a $15,000 per service civil monetary penalty, and imposition of a $100,000 civil monetary penalty for each arrangement considered to be a circumvention scheme. Although the statutory sanctions for violating the Stark law will be addressed in Phase II of the rulemaking, HCFA makes a notable reference in Phase I as to how the sanctions are viewed. In the preamble, it notes that the "primary remedy is simply nonpayment by the program, without penalties." It goes on to state that "the basic remedy is recoupment of overpayments by the program." 66 Fed. Reg. at 859. It is the threat of the large per service civil monetary penalty that has always greatly concerned providers and suppliers. Since no wrongful intent or culpable conduct is necessary to violate Stark II, it had been feared that even innocent mistakes could result in staggering financial penalties. The reduction in risk, if it is indeed reduced, will be welcomed.

The preamble did continue to add that wrongful conduct, such as the knowing submission of a claim in violation of the prohibition, could be punished through recoupment of overpayments and imposition of civil monetary penalties. It also reflects HCFA's position that such knowing violations of the Stark law could result in false claims in violation of the False Claims Act. 66 Fed. Reg. at 859-860.

INTERPLAY WITH OTHER LAWS

Throughout these final regulations, HCFA reminds us that the Stark self-referral prohibition is not the only law aimed at prohibiting similar conduct by health care providers. Due to the large areas of overlapping coverage, those counseling health care providers must remain mindful of the anti-kickback statute. 42 U.S.C. § 1320a-7b. Individuals involved in financial relationships that may implicate the Stark prohibition may also run afoul of the anti-kickback statute. While many of the Stark exceptions are similar to the safe harbors developed in connection with the anti-kickback statute, they are not identical and require separate examination. An arrangement that qualifies for a Stark exception may not qualify for safe harbor protection. Thus, health care providers may be in compliance with the Stark law but still violate the anti-kickback statute, and vice versa.

CONCLUSION

It is clear that these regulations seek to, and in many cases will, minimize the impact of the self-referral ban on health care relationships. Nevertheless, the Stark law is designed to and does intrude into common health care relationships. Since wrongful intent is not required, the concern has always been that the prohibition is so broad that it will ensnare the unwary. Given the volume of comments in response to the Stark II proposed rule and the length of Phase I of this rulemaking, it is clear that the Stark prohibition continues to be a minefield. Health care attorneys will want to stay abreast of these regulatory changes in order to guide their clients successfully. HCFA has provided this next year in order for health care providers and suppliers to restructure business arrangements in order to comply with the rule. In addition, given the lengthy comment period, attorneys may want to work with their clients to draft comments responsive to Phase I by the April 4, 2001 deadline.

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